Gatt, WTO and Globalization
Gatt, WTO and Globalization
Gatt, WTO and Globalization
Summary
What are the basic benefits of free trade? What is the role of institutions like the GATT and WTO? Brief history of GATT and WTO What are some of the big controversies over trade policy and the WTO?
Free Trade
Over the last 230 years economists have built a powerful case for lowering trade barriers and liberalizing international trade Some of the important benefits of free trade include: Increased competition which benefits consumers with lower prices and greater choice Greater economic efficiency through an international division of labour and economies of scale Faster transfer of technology and capital which creates faster growth
Exceptions
Economists have also uncovered certain exceptions to the general case for free trade. The case for free trade generally assumes a competitive economy. Under monopolistic industries or with increasing returns it may be possible for trade barriers to improve social welfare For a large economy like the US, a measure like a tariff may improve its terms of trade and therefore benefit the economy Despite these theoretical exceptions most trade economists accept the general case in favour of free trade Firstly the theoretical exceptions are not empirically important in the context of the global trade system Secondly even if in practice there may be a case for trade barriers in an increasing returns industry, identifying such an industry and calculating the optimal tariff is very difficult In practice protectionist measures will be chosen because of the political pressures rather than sound economics
Financial Globalization
While most economists support free trade in the goods markets there is more skepticism about free capital flows. There are number of reasons: Financial sector is especially prone to destabilizing market failures like contagion effects, moral hazard, adverse selection The Asian crisis showed some of the hazards of financial market liberalization. Countries like Thailand borrowed extensively short-term dollar denominated debt when it was easy to raise money during the fixed exchange rate period. However when the fixed exchange rate came under pressure and was abandoned many companies and banks were saddled with inflated debts
Hypothetical
Suppose you are in charge of the trade policy of a country and have three choices 1) 2) 3) Both countries have low trade barriers You have low trade barriers and the other country has high trade barriers Both countries have high trade barriers
Clearly 1 is the best but which is better between 2 and 3. If other countries impose trade barriers should you also raise trade barriers? Broadly speaking the answer is no though there are a few exceptions. Even if other countries impose trade barriers it doesnt make sense to raise them for your own economy. However if this is the case why dont all countries pursue free trade policies. Why are trade negotiations and the WTO needed?
Trade Negotiations
Binding: Trade agreements work by imposing limits on tariff rates for different products. Once imposed countries commit to never raising tariffs above that limit Export subsidies are not allowed with the major exception of agrigulture New import quotas are forbidden though existing quotas are sometimes allowed to continue. Such quotas have gradually been reduced
Origins of GATT
After WW2 the US and UK attempted to rebuild the global economic system which had broken down because of depression and war Bretton Woods Agreement created the IMF and World Bank GATT (General Agreement on Trade and Tariffs) was signed by 23 countries in 1947 Unlike the other two the GATT was an agreement and not a formal organization though over the decades its Geneva secretariat became a de facto organization
GATT
GATT negotiations over 47 years were divided into 8 rounds The number of countries increased sharply from 23 in the first Geneva round to 118 in the last Uruguay round The scope of trade negotiations also increased over the years Dumping and non-trade barriers were discussed in the Kennedy and Tokyo rounds The final Uruguay Round extended into new areas like intellectual property, services and agriculture. This round also paved the way for the birth of the WTO
GATT rounds
Source: FAO
The highest authority is the ministerial conference which meets at least once every two years and consists of all the WTO members One level below are the General Council, the Dispute Settlement Body and the Trade Policy Review Body
Doha Round
Launched in 2001 the focus was on helping poor countries The agenda included reducing trade barriers and cutting farm subsidies in rich countries which hurt farmers in poor countries So far the round has made little progress because of reluctance of the EU to open its agricultural markets and the US to meaningfully cut agricultural subsidies The greater power of big developing countries like China, India, Brazil and South Africa (G4) has also made negotiations more complicated
Agricultural Subsidies
Source: Earthtrends
Controversies
Some have argued that the WTO gives too little power to poor countries and that increased globalization damages the environment. Some critics claim that the WTO is too bureaucratic and is unaccountable to voters Another criticism is that WTO negotiations have become too complex and that bilateral, regional negotiations or unilateral reductions of trade barriers are more effective Some argue that intellectual property rights (IPR) should be kept distinct from trade negotiations
Conclusion
The GATT and WTO have been enormously successful in reducing trade barriers in most of the world However the WTO has many challenges in the future including: a) reducing agricultural subsidies b) handling controversies about environmental and IPR issues c) countering the trend towards regionalism and bilateralism in the trading system